newswire: 8/17/2020
- Thanks to the pandemic, Americans born in 1960 face the prospect of a steep and permanent reduction in their future Social Security benefits. This is just one of several serious challenges besetting Social Security—and a legislative fix may not be arriving anytime soon. (Mercatus Center)
- NH: Being born in one year rather than the year before or after sometimes makes all the difference. Like being drafted (or not) into a major war. Or being hit (or not) by an infant pandemic.
- Here's an interesting case where, due to program rules, being born in one particular year--1960--may end up dimming the retirement prospects of those 21 million Americans belonging to this very specific birth cohort. By our definition, this is the last cohort of the Boom Generation. Late-wave Boomers were facing serious economic challenges in any case. (See "What Is Gen Jones?") And, if the pandemic hastens an overall collapse in Social Security's spending authority, that too may happen early in their retirement. (See "Social Security was in Trouble Before the Pandemic.")
- But the issue I'm referring to here is a lot more targeted than that. It just affects wage earners born in 1960. The piece I cite here by Chuck Blahaus is a good introduction to it, but if you want more detail see this research paper by AEI researcher Andrew Biggs.
- Do you have any idea how your Social Security benefit amount is calculated? Probably not. The mechanics are complex, so hang on.
- The current benefit rules were established in 1977, and they work like this. Year after year, the Social Security Administration (SSA) keeps a record of your annual "covered" wages, that is, wages on which you pay FICA taxes. Also every year the SSA calculates the average covered wages of all workers nationally, which it calls an Average Wage Index (AWI). Then, when you reach age 60, it multiplies what you earned each year by the ratio of the AWI in this year (when you are age 60) over the AWI in each of your historical wage years. The SSA then averages all of those numbers (your "wage-indexed earnings") after allowing you to drop out some of the lowest numbers. That is your Average Indexed Monthly Earnings (AIME). Your AIME is the basic number on which your monthly benefit is computed according to a variety of formulas.
- Sure, deriving your actual monthly benefit check depends upon plenty of other complexities after your AIME is calculated. You get a reduction for retiring early, a boost for retiring late, 50% more for a nonworking spouse, and so on. But all those are modifications to your AIME. After your monthly benefit is awarded, you also get annual COLA adjustments to your benefit (based on the CPI). But again, these are all percentage modifications of your AIME. Once your AIME is calculated, all your benefits are forever (nearly) fixed as a multiplier of that amount.
- A clearer way to think about what the SSA is doing is this. It is calculating how much you earned each year relative to all workers each year, averaging that number over your lifetime, and then multiplying it times the national average wage (AWI) in the year you reach age 60. If you think about it this way, you are more likely to intuit the special importance of what happens to the average wage in the year you reach age 60. In most years, it creeps up gradually with inflation and real earnings gains. In a few years, it may anomalously jump a bit faster or decline slightly--which translates into a minor benefit or penalty (respectively) for workers reaching age 60 in those years.
- Guess when wage-earners born in 1960 are reaching age 60? That's right: in 2020. And guess what's going to happen to the AWI this year? We really don't know yet, but all indications suggest that it will fall significantly. Writing in early April, Biggs estimates that the AWI is likely to fall by 15%. After figuring in some adjustments (like tweaking the AIME for wages earned after age 60), he concludes that benefit levels for this cohort of workers will decline by about 13% relative to the slight rise they would otherwise have expected. They will certainly be much worse off than workers in the 1959 birth cohort who reached age 60 in 2019. Specifically, Biggs calculates that the median worker will lose just over $70,000 in Social Security benefits over his or her lifetime.
- Is Biggs being too pessimistic? Anyone who tracks employment data has probably noticed that average hourly earnings in the private sector have not fallen, but have actually risen slightly (by +0.5%, according to the BLS) from February through July. But the SSA doesn't use BLS data. The SSA's AWI is calculated by adding up total payroll earnings in the year and dividing that by the total number of people who reported any payroll earnings in the year. So the AWI will be including all those people who had earnings in February but later lost their earnings. Given ongoing employment losses to date (since February) of roughly 10%, Biggs' number seems in the ballpark.
- What will Congress do the fix the problem? It's unclear. Democrats have already introduced a bill in the House (H.R. 7499) that would patch over the problem by (basically) recalculating the AWI so that it cannot decline in any given year. This would be something like how the Social Security COLA currently works: Monthly benefits rise if the CPI rises YoY by over 0.5%, but they do not fall if the CPI declines.
- This may seem like an easy fix. It doesn't solve any of Social Security's bigger problems, but it solves this one. Unfortunately, in today's polarized political climate, nothing that touches Social Security can be regarded as easy.
- The Democrats are unlikely to agree to make any changes to Social Security that don't include a number of bigger expansions, such as boosting benefit levels for low-income workers and enabling the program to draw on general revenues. (And yes, H.R. 7499 does include such reforms, which probably explains why it has no Republican cosponsor.) Many fiscally conservative Republicans, on the other side, say wait a minute: This is why we have always opposed wage indexing Social Security benefits. (Blahaus is in this camp.) Why don't we move to price indexing these benefits instead? That way the fiscal burden of Social Security (as a share of GDP) would not grow over time as our society ages.
- That leaves an enormous gap that some creative political leader will need to bridge.
- One might suppose this group of Americans--everyone turning 60 this year--might come together, organize, and lobby for a change. But don't hold your breath. Political mobilization won't come easy to a population of rebels, skeptics, survivors, and libertarians. The first rule they learned during their dazed-and-confused teen years was, don't count on the system. Let me quote a line (in Carlito's Way) from Sean Penn, who is himself turning age 60 today: "There's only one rule: You save your own ass."
